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Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: Mike Buckley who wrote (25238)	5/23/2000 10:22:00 PM
From: tekboy	Read Replies (1) \| Respond to of 54805

try again: it's in plain English, with nice easy mental pictures carpetologist-style, and it's really a subject you should know about "going forward," as they say... tekboy/Ares@unlessyoujustwannatrustCha2andall.org

To: Mike Buckley who wrote (25238)	5/24/2000 1:45:00 AM
From: tekboy	Read Replies (4) \| Respond to of 54805

Yet One More Holding-Vs.-Trading Post (Sorry) Just a final thought on this subject, on the assumption that at least some who followed the recent discussion hereabouts are still, like me, working their way through it. To recap briefly, I was troubled by two facts: that the valuation junkies worried by the hyperbolic winter run-up seemed to have been proven right by the recent correction, suggesting that valuation measures might be used to guide a successful market-timing strategy; and that according to the academic literature, better-than-average performance through either market-timing or stock-picking is impossible. Together these shook my faith in the thread's basic "the surest road to riches is to select a few high-quality super-growth G&Ks and hold for the long term" philosophy. I was put somewhat at ease by my eventual conclusion that the academic literature was flawed, both because private investors were not necessarily subject to the same pressures as professional money managers (and hence conclusions from one group would not necessarily hold for the other) and because the kinds of qualitative, good-judgment-based approaches that would be likely to beat the average would not be very visible from large-N statistical studies. This suggested that it might be possible to beat the averages through both timing or stockipicking approaches, assuming of course that one had a great deal of discipline and the appropriate skills required. While reassuring me that our quest for better-than-average returns was not doomed from the start, this still didn't settle the stock-picking vs. timing question, except insofar as we (either individually or as a group) might be better at reasoned technical and financial analysis than at sensing market psychology and/or broad macro trends. The chief reasons to favor LTB&H stockpicking, in other words, seemed to be that it was well-suited to us, not that it was inherently better or easier. The major additional factor, of course--and one quite sufficient to settle the case for most of us--was the tax angle, which meant that you'd have to be really really good at trading to have even a decent shot at outperforming, because you'd be losing a sizable chunk of your profits with every move. (Transaction costs are usually mentioned here too, but I think they kinda drop out of the picture these days because they've dropped so low.) The tax angle was reinforced by testimony of the valuation junkies that in practice even they found it extraordinarily difficult to use valuation measures as a basis for successful trading (although they could and probably should be used to help pick entry points). As long as we remain in a secular bull market, therefore, G&K LTB&H seemed a fine approach. I now realize that I overlooked another obvious factor that stacks the deck even further against trading, which is the greater number of decisions required. Let's assume that because of excellent skills in their respective areas Tortoise A and Trader B both have a .75 chance of being right whenever they do something. And let's further assume that they are operating in tax-exempt accounts. It's still not likely to be close, because each Tortoise operation requires one choice while each Trader operation requires two--with a resultant success probability of .56 as opposed to .75. It seems to me that the only way the trader is likely to come out on top is if the game is played out during a market characterized by high volatility within a basically flat trading range--and even then it will require lots of successful trades, and hence a ton of attention, effort, and tsuris. ok, I think I've convinced myself that it's still worth holding on to these bloated story stocks whose precipitous decline has borne out T.S. Eliot's observation that "April is the cruelest month, followed closely by March and May, especially when following an irrationally exuberant December, January and February." tekboy/Ares@reinventingthewheel.org